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Executive Summary

The Review's Origins and Terms of Reference

On May 15, 2012 Kathleen Wynne, the Minister of Municipal Affairs and Housing announced that Tony Dean was appointed as the independent Reviewer of the governance model created under the OMERS Act 2006. The OMERS Review Act 2006 requires that:

The review be based on the actual governance and administration of OMERS since proclamation of the Ontario Municipal Employees Retirement System Act, 2006.

Certain matters be addressed in the review:

The effectiveness and fairness of the governance model:

In representing the interests of the employers that participate in the OMERS pension plans and the members and former members of the OMERS pension plans;

In ensuring the efficient governance of OMERS; and,

In ensuring the accountability of OMERS.

The efficiency and effectiveness of decision-making by the Sponsors Corporation, including its use of the supplementary decision-making mechanisms set out in or permitted in the Ontario Municipal Employees Retirement System Act, 2006.

The effectiveness of the governance model in ensuring the overall fairness and financial stability of OMERS and, in particular, in ensuring that there is no subsidy of a supplemental plan by the primary pension plan.

Certain matters not be addressed in the review:

Reconsideration of the general principle of giving the responsibility for the governance of the OMERS pension plans to the employers that participate in the OMERS pension plans and the members and former members of the plans.

Consideration as to whether any supplemental plan established under OMERS should be continued.

The Ontario Municipal Employees Retirement System (OMERS)

OMERS is one of the largest pension plans in Canada, holding over $55 billion in net assets. It manages a diverse portfolio of stocks, bonds, real estate, infrastructure and private equity investments. It is not only a large investment entity in Canada but is also a significant investor internationally and has been widely recognized as a success story.

As with many of its counterparts OMERS continues to experience some stress arising from volatility following the financial collapse in 2008. It has a sizable funding deficit and has been forced to make some tough decisions on contribution rates and plan design changes to address this.

In addition, OMERS now operates in an environment in which public sector plans are under close scrutiny. These plans are increasingly criticized as being overly generous and out of touch with developments in the private sector in which defined contribution plans are becoming the norm.

The world of pension investing is also becoming more competitive as plans look to increase alternative investments in areas of infrastructure and commercial real estate development.

OMERS is a jointly-sponsored pension plan. Prior to 2006 the government of Ontario acted as its sponsor but this changed in 2006 with the passage of legislation which fully devolved ownership to the employers and plan members who fund the plan and its benefits.

OMERS is now governed under a bicameral arrangement under which there are two corporations, each with its own board of directors. The Sponsors Corporation (SC) and board provide for strategic oversight and decision-making by sponsors on major policy directions including benefits and contribution rates.

In parallel, the Administration Corporation (AC) and board are accountable for the management team's day-to-day business operations of the plan, including the management of investment portfolios, paying pension benefits and ensuring compliance with financial regulations such as those governing actuarial valuations. This board has major fiduciary responsibilities in the sense that it must act only in the interests of pension plan members as a whole and hence in fiduciary matters must maintain full independence from plan sponsors.

Client service surveys of employers and members indicate a tremendous degree of satisfaction with the pension information that is communicated to them.

The two OMERS boards are populated with individuals tremendously committed to the plan and who have dedicated a significant amount of their time to ensure that the plan achieves success.

Both corporations have hired executives with a high level of expertise. The two OMERS boards have made efforts to work more efficiently and effectively as organizations and to work more collaboratively, although there have been some long-standing areas of tension between the two boards. These have been surfaced and discussed in the course of this review and some positive momentum has occurred and this must continue. It is vital for plan members that these issues be addressed.

Principles and Approaches Adopted for the Review

The following principles were adopted for the review and were communicated to stakeholders from the outset:

Openness: Anyone wanting to participate/contribute to the review should be given the opportunity to do so.

Transparency: Information about the review should be shared with stakeholders to the fullest extent appropriate.

Timeliness: The review should be conducted in as efficient and timely a manner as possible.

Scope: The review should adhere to the issues laid out in the legislation.

As stakeholders were heard and issues surfaced, the following principles stood out to the Reviewer as important in guiding the thinking of the Review Team and its iterative discussions with stakeholders:

The overriding lens for the review must be about what is best for plan members;

Foundational principles of good governance apply to all pension plans without exception;

In Jointly Sponsored Pension Plans (JSPPs), the culture of collective bargaining and the legal requirements for fiduciary responsibility are each part of the operating context but for all of the parties there is a clear line between these two worlds that must be respected;

While there are obvious opportunities to make recommendations to refine the legislation in order to accomplish necessary improvements, the best solutions will be consensual ones arrived at by the owners and stakeholders. These solutions crafted together by owners and stakeholders are likely to be better received. In that sense, imposed solutions are undesirable, unless they are collectively driven;

The Corporations should use their existing authorities to address these issues to the fullest extent possible without opening up the legislation; and,

The reputation of OMERS is critical. That is, how it is viewed by plan members, sponsors, the investment community and competitors.

The Process and Substance of the Review

Phase 1: Between May and June 2012 the Review Team was assembled, a work plan was drawn up, a website established and an invitation for submissions was sent to OMERS stakeholders together with a consultation guide.

Phase 2: From late June to early September 2012 the Review Team held 26 meetings with stakeholders and received 28 written submissions, including submissions from the boards of OMERS. All were of high quality and demonstrated a high degree of commitment to the OMERS plan members and the overall success of the plan.

Phase 3: Work throughout September involved analysis of the consultation findings and how the governance of OMERS compared to that of other large pension plans. The majority of the topics raised fell into three main themes:

The need for aligned, efficient and transparent decision-making processes with clear accountability structures. The division of responsibilities and decision-making powers between the boards is well understood. It generally works efficiently and produces fair and equitable outcomes. Problems have arisen for the boards in so called "cross-over" areas where both boards see a need for greater involvement, or at least more information, in areas solely under the authority of its counterpart board. The most significant of these involved plan and membership growth and funding (in particular, the periodic valuation of the plan's assets and liabilities).

Fairness in representation on both boards. With sponsorship of the OMERS plans lying with approximately 36 unionized and non-union employee groups and almost a thousand employers, it is inevitable that some sponsors will not have an opportunity to sit at the board table of either the SC or AC.
Generally speaking, SC by-laws operate under principles which see representation based predominantly on headcount. Under this model, the Canadian Union of Public Employees (CUPE) and the Association of Municipalities of Ontario (AMO) hold the most significant weight on the boards.
Issues of fairness in representation were vigorously raised by three broad-based groups: management and non-unionized employees; smaller unions; and retiree groups. They raised major concerns about the lack of information provided to them on decisions affecting the plan and their overall lack of voice in decision-making. To put it simply: they feel shut off from information and shut out of decision making. All three groups are seeking direct representation on the boards (in the case of retirees, some additional representation).
Under the rubric of representation other stakeholders questioned the SC's by-law which has entrenched weighted voting, with a resulting dominance of CUPE and AMO on the boards and in the roles of co-chairs of the SC.

The presence of high-level expertise and capacity on the administration board. The most significant issue arising in consultations with stakeholders and experts related to the level of expertise and capacity on the AC board. Governance literature and pension experts emphasize the importance of best-in-class board capacity as a critical success factor in the achievement of pension plan goals. There is a widespread belief that this is a vulnerability in the OMERS governance structure and hence for the plan as a whole:

Pension experts familiar with the OMERS governance structure identified concerns about the capacity of the AC board and its ability to effectively oversee and challenge a world-class management team;

The AC board raised substantial concerns about its own level of capacity to administer and oversee a large pension fund holding $55 billion in assets on behalf of over 420,000 plan members. The AC board called for a much more rigorous process for determining key board capacities and for selecting the talent aligned with those capacities and for the appointment of an independent chair; and,

Concerns have been raised by a number of parties that the current model of appointments might conceivably result in a perception of conflict on the part of appointees between their allegiance to the appointing sponsor and their fiduciary responsibilities or a perception that board members are not acting in an adequately independent manner from the management team.

Many of these issues are also central in the literature on pension governance and were raised with the Reviewer by pension and governance experts.

Phase 4: From October 2012 to January 2013 - the final phase of the review -centred on the preparation of this report. Consistent with the philosophy of encouraging home-grown efforts to address any governance issues arising from the review, the Review Team met and worked with the chairs of the AC and SC boards to discuss approaches to some of the evident challenges in the organization.

Progress Made in Internal Discussions

Despite some pre-existing tensions in their relationship, board representatives worked hard in this process, taking a problem-solving approach in the discussions and looking for opportunities for greater cooperation and collaboration. It is a testament to these efforts that the boards subsequently endorsed many of the recommendations arising from those discussions.

In terms of aligning roles and responsibilities, significant progress was made in developing protocols for improved communication and collaboration on major issues such as growth, plan changes and actuarial valuations and assumptions. This had been a significant irritant between the boards for a considerable time.

On the issue of board representation, progress was also made on obvious opportunities for improved communications, outreach and engagement with stakeholders, smaller unions and unaffiliated groups.

In the third area, dealing with the capacity of the AC board, progress was more difficult. There was broad acknowledgement both internally and external to the organization that the AC board would benefit from having higher capacity and the AC itself supported this in its own written submission to the Reviewer. On the other hand one or two sponsors were cautious about losing what they consider to be an important sponsor-related representational presence on that board. The recommendations in this report calling for improved capacity on the AC board respect that concern. They also acknowledge the current right of the SC board to make appointments to the AC board on the recommendation of sponsors.

On a related matter, both boards strongly endorsed the Reviewer's proposal that a strong, independent chair be appointed to lead the AC board.

Recommendations

Detailed recommendations are provided in the body of the report.

Given the process involved in this review, there will be no surprises in the recommendations for the boards of OMERS. Some recommendations have been crafted together with representatives of the boards and many have already been endorsed by both boards, at the very least at the level of principle.

There are a small number of manageable recommendations. There is no reason why implementation should not commence on all of them in short order.

Recommendation eight focuses on implementation of the recommendations and is based on best practices observed in other large and complex organizations. The adoption of this recommendation is as important as those dealing with the substance of the review.